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Nov. 13 2009 - 12:02 pm | 4,406 views | 6 recommendations | 32 comments

Don’t fall in the poverty trap – you might never get out…

image via wikipedia

image via wikipedia

Until you earn about $40,000 a year, you’re pretty much stuck in poverty, an economists’ numbers show.

In fact, until you get past $40,000 a year, any raise or higher paying job you get might actually sink you deeper into poverty.

Take a look at this story from economist Jeff Liebman, who now works in the Obama Administration.

The poverty trap is still very much a reality in the U.S.

A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs, etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000.

Take a look at this chart by economist  Clifford Thies, via Greg Mankiw’s blog. The Dead ZoneFrom the green dot, you can see that earned income rises… for a while. Then there’s this screwy wavy line. That’s the mother making a little more, but earning a little less.

$40,000 a year is about $19 an hour. Over 40 percent of Chicagoans don’t earn that much.

There aren’t that many jobs out there that make $19 an hour. Bank Teller? $13.33 an hour. Office clerk? $15.60. Retail salesperson? $11.80. Security guard? $16.14. (statistics via Chicago Rehab network).

Our tax incentives work… initially. Then they only serve to hurt people. They say the poor don’t work hard enough, but that single mother sounds like a pretty hard working person to me. The story goes on to say that she got a weekend job, to try to make ends meet. Except after childcare and gas, it didn’t help at all.

So if working harder means people might actually earn less, how is it that we expect people to work harder?


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3 T/S Member Comments Called Out, 32 Total Comments
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  1. collapse expand

    eligibility cliffs are definitely a huge problem. check out this article from the northwestern journal of law and social policy for more information – http://www.law.northwestern.edu/journals/njlsp/v4/n1/5/

  2. collapse expand

    Excellent post, Megan. It is crazy to think that people who get a “raise” might make less money than before.

  3. collapse expand

    You wrote: “So if working harder means people might actually earn less, how is it that we expect people to work harder?”

    She isn’t EARNING less money by working harder, she is earning more money. She is NETTING less money because she is receiving fewer subsidies from the government.

  4. collapse expand

    Unless I’ve misread something, $580/month of those issues are due to her own thoughtlessness.

    I feel for her, but:

    1) It’s dumb to not calculate the total pay including benefits of a job. That $230/month for health care at her new place is $2,760/year.

    2) It’s dumb to not take into account commuting costs. You don’t have to be a rocket scientist to know that if your commute changes from a local place to a distant place with high parking expenses that you’ll keep less of your paycheck. So that $3,600/year she’s paying in extra parking and gas (and not including the, eventually, higher maintenance for her car) should have been know ahead of time to her.

    That’s well over $6,000/year of post-tax income she has to spend by taking the new job, that she could have EASILY calculated first. She should have known ahead of time that with those changes, she, at best, would only clear an extra $3,600/year, and she should have known she’d lose some of that to taxes.

    I feel for her, but the vast majority of her problem is caused by her own mistakes, and not caused by “the system.”

    I completely agree that Section 8 and childcare subsidy programs should be improved, but the example you give isn’t a very convincing one.

    • collapse expand

      The thing that bugs me about comments like this, emathais, is that you seem to need the perfect person in order to feel any sympathy or realize that people need help. I sometimes hesitate to do posts like these, because it just becomes a game where we pick someone apart to see if they are “worthy” of help.

      So, what you’re saying is, she should have turned down a job making $10,000 more a year and kept on taking government subsidies? She should have kept taking medicaid and child care credits from the government because it was cheaper that way?

      We criticize people for taking government money, and then we criticize them for being so foolish as to stop taking them. That’s foolish.

      In response to another comment. See in context »
      • collapse expand

        Listen Megan, you don’t list your qualifications to write this column, claiming, with a huge chip on your shoulder, that if readers need to see them, they probably won’t like your work anyway. You miss the point of credentials – for many of us they provide a frame of reference, not eligibility criteria.

        I won’t bore you with mine, either, but suffice it to say that, like you, I have some. Your article didn’t bother me, but your defensive reply does. I sympathize a lot with the impoverished and have been pretty close at times to being able to empathize with them.

        I’m not a Republican, I’m not a Libertarian, and I’m not even all that much of a “bootstraps” believer. But it bothers me when people advocate money alone as the solution. A lot of your articles correctly point out other issues contributing to poverty – teen motherhood, lead paint, to name just a couple from another recent article – so I know you know that money isn’t the only answer. I’m just pointing out with your example that a better solution might be teaching the impoverished how to analyse their financial situation and evaluate both the short-term impact of a new job on their finances including things like extra health care, extra gas, extra parking, AND long-term effects. That’s especially true if the $25,000/job was dead-end, but the $35,000 job was entry-level. In that case, even short-term hardship would be more than worth it in the long term.

        I know some poverty-stricken people just can’t find opportunity, but many others don’t have the skills to evaluate it when they do find opportunity. Advocating for better financial understanding would be better at helping people make the decisions necessary to climb out of poverty than a couple hundred dollars a month would.

        I guess, in summary, I’m just saying, “Don’t miss the forest for the trees.”

        In response to another comment. See in context »
        • collapse expand

          I’m sorry that you feel I have a chip on my shoulder. I just don’t like listing qualifications. It’s my preference. If you need to know, my degree is in political science. I’ve worked quite a few different jobs, including reporting in radio, for newspapers and online. I mostly write about public housing, poverty and urban problems. If you need a more detailed list, I’d be happy to send you my resume.

          I apologize if you felt my tone was defensive. I was simply reacting to your list. It frustrates me when the first thing people do is scrutinize the individual for mistakes. It seems like people often miss the bigger picture. Perhaps you were trying to make a point about financial planning, and I didn’t see that.

          I didn’t, in fact, propose any solutions, which perhaps frustrated you. I only pointed out that sometimes, people try to move forward, and it becomes difficult for them to keep making forward progress. Would or did this single mother make it eventually past that dip? Perhaps she did. But it’s not always so easy. That’s all I was pointing out.

          In response to another comment. See in context »
      • collapse expand

        I think you touch upon a phenomenon here that is really worth exploring: even in our current national Depression, we’re culturally predisposed to blame the victims (the poorest, least politically empowered to bring about change). We see this everywhere; from the victims of credit card debt, fradulent mortgages and the sick seeking medical care. As a nation we seem to have lost our capacity for introspection, empathy and Christian charity – and the worst offenders are those who claim to follow the Christian faith and philosophy.

        Thanks for the excellent article.

        In response to another comment. See in context »
  5. collapse expand

    Thanks for this post.

    In this economy, where people who keep turning up their noses at whatever jobs they can even get an interview for, let alone get hired into, how can you attack someone for “doing the right thing”? Better she should keep sucking up govermment entitlements, I guess. That, or end up living in your car — a great choice in a Chicago winter.

  6. collapse expand

    Don’t tell me that you read Greg’s blog too Megan! That would be another thing we have in common. Greg’s a great economist but I’m pretty sure he wasn’t the origin of that chart. Anyway, as you probably know my opinion by now, it’s just another way government hurts more than they help. Just think of all the incentive you would have to move up once you remove all the government programs and the stupid progressive income tax. It seems a fellow commenter above, emathias, is putting all the blame on the individual and ignoring the bigger picture. That seems silly to me. People on the whole behave rationally, so worrying about any individuals behavior won’t solve anything. You need to look at what’s motivating their behavior and change that. And in my opinion, the best fix would be less government.

    • collapse expand

      You’re right – correction: the chart comes from here: http://mises.org/daily/3822, but Greg did have it on his blog. I need to learn to read better :)

      I agree that the incentives aren’t working to her benefit here – at least not her long term benefit – and I also agree that most government programs don’t help people make the right choices. Welfare, for example, which motivates people to stay in low income jobs so they don’t lose their benefits, or stay unmarried for the same reason. I’m working on a post about marriage incentives that I’m curious about your reaction to.

      But – here’s what I wonder. If this woman never had some of this help – for example, the child care assistance – would she be able, as a single mother, to get a job in the first place. The government subsidies helped get her to a place where she could support herself, but they didn’t take her quite far enough.

      There’s a program that CHA runs called Family Self Sufficiency – and it’s a five year program. It’s really intense. The head of the family sets five year goals – to finish school, get a promotion or own their own home. As their income goes up, the money they would put toward a rent increase as a percentage of income is put into an escrow account, and CHA also contributes money. If they meet their goals and graduate from the program, they get the money. People make huge leaps in this program and don’t usually end up going backward. But small scale programs like this aren’t usually successful when we make them a huge program because they lose effectiveness.

      Anyway, long response. Still thinking about income taxes and generosity. Reading a book on it actually! I’ll write about it someday soon.

      In response to another comment. See in context »
  7. collapse expand

    Hi Megan,
    I cannot help but critically question your reasoning in this article. You say, “So if working harder means people might actually earn less, how is it that we expect people to work harder?”

    However, as it is clearly the case, this woman is working harder and earning MORE, not less. Her salary has risen from $25k to $35k a year. She is earning $10k more than she was before.

    You do not “earn” government subsidies. You do not “earn” hand outs and donations. This woman may have an easier life at a $25k salary, but she isn’t “earning” that easy life.

    In fact, I think your entire definition of earned income is wrong. Many various web references list earned income as “Compensation from participation in a business, including wages, salary, tips, commissions and bonuses. opposite of unearned income.” (or a similar definition therein). I do not believe hand outs are a part of that, no matter what a few economists like to think.

    I live in Boston, and take public transit to work. I could easily afford to commute using my car if I chose to, but I choose the subway because it’s cheap. If this woman made the same choice, she would have that extra cash she needs and be “earning” her way in life.

    This womans problem is seemingly not the system, but her own intelligence.

    • collapse expand

      Hi Chris –

      Thanks so much for reading and commenting.

      I understand where you’re coming from, but I don’t agree that the single mother in this example had an “easy life” living on government subsidies. I think she was doing the best that she could, trying to earn a living for herself and her kid, which isn’t very easy at all as a single parent. She got to move up the salary ladder, but it meant her help went away, essentially putting her back where she started.

      No, you don’t “earn” government subsidies. They exist because we’ve agreed as a society that rather than let people starve or waste away without help, that we want to help each other. We don’t want children of single mothers to be destitute. So we help. It’s part of the social contract.

      It’s great that you can choose to save money by taking the subway. But many people live in cities where there’s no public transit. What if the day care is in the completely opposite direction as her work? Could she clip coupons, shop at costco or do other things that could save her a bit of cash? I’m sure she could. But what I’m trying to say is that we help people – but there’s a point where people still need a little big of help. They’re already helping themselves, and if we could invest in these families that are already doing so, we might see a lot of people move up a lot farther and become self sustainable.

      A lot of these programs, especially child care subsidies, are really a hand up, not a hand out. They help people move forward, not stay at the bottom forever.

      Again, thanks for reading!

      In response to another comment. See in context »
      • collapse expand

        Hi Megan,
        Thank you for conceding the “earned income” argument. And you are right about the social contract, I don’t want people poor in the streets anymore than the next person, and certainly not children.

        But there is a limit.

        My subway comment was made because it applies to her directly; she could take the same subway and bus that I do. If she truly does work in Boston and live in a suburb it is available to her for only $59 per month.

        Another commenter pointed out that this should all have been known to her, and that is true. She is obviously incapable of basic budgeting skills.

        My point in these comments is that your article makes it seem as though it’s not her/their fault that she/they are in this situation, that she/they are trapped. The truth is, the system didn’t put her/them there, and they are lucky to get what they get, especially in a time of virtual national governmental bankruptcy.

        This woman should be used as an example of basic life and family planning needs, not about there being a trap in the amount the government gives in subsidies. If she budgeted and planned her life properly, she wouldn’t need those subsidies at $35k.

        And I’d like to point out here that $35k is about or above the average starting salary of graduates from the majority of colleges in this country. Granted most students don’t have children to take care of, but they do have rent, health insurance, and those oh so important student loans.

        Also, I never said she had the “easy life.” I said she had an “easier” life (minus a grammatical typo later in that line). That is a small but very significant difference. I would never try to argue someone making $25k a year has an easy life.

        In response to another comment. See in context »
        • collapse expand

          But how should she make the jump then?

          So, say she did plan and budget (which we really don’t know that she didn’t do – it doesn’t say). Do you really want her to say no to a job making more money and stay on government subsidies? That just doesn’t seem like an answer to me.

          As far as saying the system didn’t put her there, we really don’t know that. If she’s a minority woman who grew up in a segregated, poor neighborhood, there’s a very good chance that the system created a lot of the wealth discrepancies in her life. That may not be the case, but we don’t know that for sure.

          As far as being lucky to get what they get, I’m sure that’s true, but it hardly seems like a compassionate argument for helping the poor.

          Perhaps she did need budgeting help. But I just don’t see how we expect her to turn down a job making more money and stay on government subsidies. I mean, isn’t that exactly what we want people to do?

          It all comes down to a major rift in liberal poverty policy: do we help the poorest of the poor, or do we concentrate our money on the people who could use our help just a little longer and really kick poverty for good?

          In response to another comment. See in context »
  8. collapse expand

    The person profiled has made several “mistakes” in her life, as have I, and there are financial penalties for these mistakes. Such as: single motherhood. (I did it for three years and don’t recommend it for anyone.)
    Does she have a college degree? High school? Lacking either of these degrees in this society exacts an economic penalty.
    One more point this article doesn’t address is financial mobility, both up and down. She could get a raise or a promotion. Or, she could get laid off.
    But here is the big question: what does government support do to individuals both short term and long term?
    When the solution to government help is to “earn less”, I think the answer is obvious.
    And remember, a lifetime of “earn less” locks in a low social security payment in old age.
    I know the purpose of the article is to show how “heartless” government programs are to good individuals, and I agree. That’s why my advice to the woman in the article is earn more! Fill the gap now with things she can do at home so she can be with her kids. Babysitting nights and weekends would be ideal.
    And cut expenses. How about using public transportation? Even part way would help.
    But this all leads to my best piece of advice. Use government programs as temporary help. Get away from them as soon as possible. Government programs are “heartless” because their scope and size require a rule-based, inflexible process to reduce fraud. And every program produces weird, unintended consequences.
    So, make your own way. It’s good for your soul, a good example for your children, and good for your pocketbook.
    Earn less? Stay dependent on the government? No way.

  9. collapse expand

    I got railroaded out of high school for genius in a lot of areas and a learning disability in one.

    I asked for help, got none, and work a waaaay below poverty level job now, after dropping out.

    Budgeted and saved…between the rent and suddenly reduced hours (with more business this year, yay!) I’m broke.

    Planned on a whole 15k/yr tops.

    Some of us are idiots, sure. Others have people depending on them and no reserve left for jumping ships.

    Pious poster above a ways is a joke or got lucky in life.

  10. collapse expand

    Wow! What a fantastic article!

    As a single mom, who last year earned 19,000 (just did my taxes!) this story hits home. My kids were on medicaid (free health insurance) and child care vouchers and it really helped a lot- but we were living paycheck to paycheck with little help from my ex-husband. (I could go on a tangent about that one, but I’ll stay away from it) It was difficult, being poor is not supposed to be easy- but at one point last May, when the little my ex owed in child support was reduced- again- and the tiny portion of what he paid of that became even less- again. I went home and did the math and I realized exactly what your single mom in the article realized- I was trapped.

    I had to make at least another thousand dollars a month just to cover the cost of the health insurance, child care, and to maintain my current standard of living (rice and beans and beans and rice driving an old Ford Taurus living in a tiny apartment). A thousand dollars a month? Not too many jobs out there offer a 160% raise to a single mom that spent the last six years as a stay at home mom! And that would just be with the exact same expenses!

    I’m beyond grateful for the crazy amount of faith my now-employer has placed in me by offering me a real job- to yes- that coveted 40k slot. Still tight. Still rice and beans and beans and rice driving an old Ford Taurus and living in a tiny apartment… but I’ll be damned if I’m not doing it myself and loving every minute of it!

    I know several of my fellow poor-single-mom friends that I left in poverty. They want out. They hate it. They need help. Not MORE help, better help- help that gets them out. The programs that are available are hard to find, harder to get into, and nearly impossible for a woman that already has the burden of a single care-taker resting on her shoulders.

    I would love to hear someone with your intelligence and obvious attention to real details hit on a topic like child support enforcement- obviously a subject near and dear to my heart… just an idea. :)

  11. collapse expand

    If one lives in a foreign country, it is fascinating how much a U.S. family has to earn just to get by. A 40,000 dollar income in most countries is more than sufficient to live on.
    I guess the question is what do Americans need to spend so much money on. Food in the U.S. is not more expensive. Is it health care? taxes?

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    About Me

    I'm a journalist living in Chicago writing about poverty and public housing. I don't come from the streets - I grew up on a farm. But I'm passionate about urban issues and getting to know people who are completely different from me. I'm quirky, funny and friendly.

    I have this idea about journalism - that it should be approachable and less "newsy." I want my stories to make you laugh, cry and draw you in to neighborhoods and situations you don't deal with every day. I hate the broadcaster voice. I hate TV news. I hate the inverted pyramid. I love surprise. I love humor. I love people and telling their stories.

    In addition to being a journalist, I also teach dance for the Chicago Public Schools. I don't just do it for the money. I love children and love arts education. I'm also on the board of a new nonprofit dedicated to helping the underserved find jobs called Employing Hope. I write fiction, keep house, and am generally a renaissance woman.

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    Contributor Since: October 2009